Supply Chain Insider

2019 Commodity Food Costs Forecast

12 | 18 | 2018 |
Articles

At a time when many restaurant operators have seen flat or declining traffic counts, one positive factor has been the downward market pressure on commodity food costs. This has enabled many successful LTOs and helped bolster margins in a competitive environment.

The good news is that commodity pricing generally should remain low in 2019. Still, there are signs that prices in some categories are bottoming out and likely to become more volatile in the next 12 months. Here’s a look at what food supply chain experts see ahead.

Most Beef and Pork Prices Will Moderate Further

Five straight years of declining feed costs have encouraged record supplies of beef and pork, according to Bill Lapp, Principal Economist at Advanced Economic Solutions (AES), a consultancy specializing in food price forecasting and procurement. General pricing should remain low for these proteins and may drop further in 2019, he says, with expanding supplies of beef driving patty meat lower over the year.

Beef and pork prices could well drop five to seven percent by the third or fourth quarter, agrees Bryce Anderson, Director of Protein Commodities for SpenDifference. But he cautions there are exceptions. “For example, 120 beef brisket and the cap and wedge lifter meat, among others, may not follow this trend line,” Anderson says. He cites record demand for barbecue brisket and thin-sliced beef as putting upward price pressure on those cuts.

Both Lapp and Anderson say they are keeping a close eye on other factors that could change the picture. One would be a significant spread of African Swine Fever in China and Europe. The disease is not a danger to human health and reported outbreaks in those regions have been limited so far. However, it is highly contagious among swine and could require large herd culls if quarantine measures fail. For now, the disease has modestly supported pork prices due to slightly increased U.S. export demand. Should the disease spread, it could significantly change pork’s global supply picture, putting additional pressure on markets.

Poultry Prices Hitting Bottom

2018 gave restaurant operators record low prices for chicken breast, but that trend appears to be bottoming out. Shrinking margins make it likely producers will respond with somewhat decreased production next year, Anderson believes. “Operators planning LTOs would do well to look toward pork and beef, as chicken prices will probably go up,” he says.

“Right now may be the most favorable time to lock in contract pricing for chicken,” Lapp adds, especially given the seasonal increases typically seen in the second quarter.

Dairy, Oil and Grain Markets

Many experts believe the cheese market has also hit bottom, with modest price increases ahead. According to Amy Smith, Director Commodities for SpenDifference, now is a good time to firm up cheese contracts for at least the first half of the year. In contrast, she observes that even increased supplies of butter have struggled to keep up with booming demand but is cautiously hopeful that demand—and butter prices—may moderate by the middle of 2019.

As for the grain market, Smith says “The soy market is in turmoil,” with growers sitting on large surpluses due to Chinese tariff increases. “Prices are attractive,” offering buyers very appealing deals. There is a lot of uncertainty over how long that situation will continue, and she says buyers will keep a close eye on USDA’s 2019 planting estimates, due in late March, as well as harvest numbers coming out of growing regions in South America later in the year.

Bountiful crop yields have kept corn and feed prices low. Wheat prices have fluctuated, with some recent softening due to supplies entering the market from Russia last summer. Russian market activity is always unpredictable and the current situation could change.

“There could be risk in the wheat market right now,” Smith says, as planting regions have remained wet and farmers are behind in their normal schedules. “I recommend to clients that when you’re below the second quartile in historical pricing, it is time to consider covering commodity raw material because there is more risk out there that prices could suddenly shoot higher. Mother nature isn’t always forgiving.”

2019 Holds Many Unknowns

Changes in U.S. tariff policy—and responses from international trading partners— are roiling markets and creating more uncertainties than usual for the year ahead. So far, the biggest impact has been to reduce U.S. exports, increasing domestic supplies and putting downward price pressure on U.S. products like cheese and pork.

Lapp notes that seafood has been an exception because the U.S. imports large amounts from Asia. Should threatened increases in the tariffs on those products occur in 2019, the impact could be very significant for the restaurant chains that rely on them. Some have been stockpiling frozen supplies as a hedge against that eventuality.

Additional uncertainty comes from proposed changes in U.S. biofuels regulations. These reflect the competing interests of farmers and oil refiners and could significantly change soy and corn demand. It remains a wildcard that will play out in the political realm in 2019.

Freight costs, which are a component in grain milling and other producer contracts as well as in delivered costs, increased throughout 2018. “The industry is looking for ways to deal with this and on the logistics side a good strategy will be to look for more ways to ship full truckloads,” Anderson says.

Finally, as always, U.S. weather conditions are unpredictable and can play havoc with crop yield forecasts. Operators looking to ensure food cost advantage in the year ahead will do well to lock in attractive pricing in advance of likely seasonal and cyclical increases to come in 2019.